Why banks insist for execution of documents for loans?

Those who have taken loans from banks are familiar with execution of documents. Often borrowers are required to sign a set of agreements and other papers. 

What is documentation? What is execution of documents? 

Section 3 of the Indian Evidence Act 1872 defines a document as “any matter expressed or described upon any substance by means of letters, figures or marks or by more than one of these means, intended to be used or which may be used, for the purpose of recording the matter".

The term "Documentation” means the proper way of recording the terms and conditions of a contract entered into between the concerned parties. In banking, a "Document” means a written record prepared to evidence a banking transaction.  Conscious authentication of documents by affixing signature on the documents in personal capacity or as authorised representative of a person, firm or company is known as execution of documents.  Execution of documents is a conscious act  with proper knowledge of the contents and with a clear intention to give effect to the terms and conditions contained in the document. 

Account Opening form, Loan Documents, Balance Confirmation Letter or written communications between the customer and bank relating to a banking transaction are all treated as documents.  Any record, that describes the terms and conditions of the contract between a bank and its customer is a document.  

Why documentation is necessary to avail bank loans?

Documentation plays a vital role in lending.  Meticulous documentation is carried out banks to establish their rights before a court of law. Execution of documents also enables banks to create its charges over the assets of the borrower/ guarantor/ assets created out of the loan.  

Proper documentation serves the following purposes:-

1.    It helps to identify the security and create charge on the security. 
2.    It helps identifying the borrower/ guarantor/other parties
3.    It serves as a documentary evidence of the transaction before the court of law.
4.    Documentation is an evidence of the terms and conditions of the sanction of the credit facility. 
5.    It enables Banks to enforce their rights and charges on securities even without intervention of courts, like in the case of SARFAESI actions. 

Deficiencies in documentation may give an opportunity to the borrower to challenge the claim of the bank on technical backgrounds or delay recovery proceedings, in case the account become bad. Hence banks take maximum precaution in the execution of documents. 

What are the factors considered in selection of documents?

The selection of documents depends mainly on the following aspects:

a.    Nature of the credit facility
b.    Nature of securities offered for the credit facility/ the nature of asset created by availing of the loan. Hypothecation, pledge and assignment are normal modes for charge creation when movable securities, gold ornaments, life insurance policies etc are involved. When land or building is accepted as security, equitable mortgage or other type of mortgages  is used. 
c.    Constitution of borrower is another parameter for selection of documents. Separate documents are used for individuals, HUFs, partnerships, companies, limited liability partnerships etc. 
d.    Banks stipulates certain conditions and terms based on the type of credit facility. Also banks collects a copy of the sanction order duly signed by the borrowers/ guarantors as proof of acceptance of all terms and conditions.